Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Whether services performed by a foreign affiliate in connection with a guarantee or warrantee associated with a product sold by the taxpayer would be considered as a service performed in connection with the sale of the product for the purposes of paragraph 95(3)(b).
Position: No
Reasons: The service must be performed directly in connection with the sale. There must be direct involvement in the actual sale or negotiation process. This position is consistent with the Department view on a similar phrase used in subparagraph 212(1)(d)(iii).
1997 Tax Executives Institute Conference
Question XV
Foreign Affiliates - Services Performed In Connection With the Purchase or Sale of Goods
Paragraph 95(2)(b) of the Act provides that the provision of certain services or the undertaking to provide those services shall be deemed to be a separate business, other than an active business, carried on by the affiliate and any income from that business or that pertains to or is incident to the business shall be deemed to be income from a business other than an active business. However, paragraph 95(3)(b) excludes from the definition of "services" for the purposes of paragraph 95(2)(b), services performed in connection with the purchase or sale of goods.
Where a Canadian parent company pays its wholly-owned U.S. subsidiary to perform service calls on customers who have bought products directly from the Canadian parent, will any post sale service on a product be considered as "performed in connection with ...the sale" for the purposes of paragraph 95(3)(b)?
Department’s Position
Whether or not a service performed by a foreign affiliate of a taxpayer resident in Canada for the taxpayer or a person related to the taxpayer falls within paragraph 95(3)(b) is a question of fact. Generally, however, it is the our view that only services that are directly related to the sales function would qualify. Therefore services provided by a foreign affiliate to a taxpayer in connection with either a guarantee or a warrantee associated with a product sold by the taxpayer would not qualify for the exclusion under paragraph 95(3)(b) as having been performed in connection with the sale of goods.
Prepared by: Olli Laurikainen
November 12, 1997
File: 972977